Home > Economics - General > Handicapping the Oz-NZ GDP growth race

Handicapping the Oz-NZ GDP growth race

April 4th, 2015

There has been even more media excitement about the fact that New Zealand is currently experiencing more rapid economic growth than Australia. This is largely due to the fact that the two economies are in different phases of the medium term macroeconomic cycle.

However, there is another important factor that needs to be taken into account in making comparisons of this kind. Given access to the same technology, and with similar levels of education, poor countries will grow faster than rich ones, and will eventually converge to similar level of income. There’s a huge literature on this, to which I contributed a little bit back in the 1990s. The key finding is that, on average and under the conditions just stated, we should expect to see a poorer country make up around 2 per cent of the income gap with a richer country each year. That is, convergence will typically take around 50 years (there’s some tricky Zeno-style paradoxes here, which I don’t have room to discuss)

How does this affect comparisons between Australia and New Zealand. The IMF estimates here give income per person of 45138 for Australian and 33626 for New Zealand. So Australia’s income is about 35 per cent above the New Zealand level. The two countries were roughly on a par until the 1970s.

The standard convergence estimate is that NZ should make up about 2 per cent of that gap (or 0.7 per cent of GDP) each year. If the gap is larger, NZ could reasonably be said to be outperforming Australia for the year in question, relative to the standard 50 year timeframe for convergence. If the gap is smaller, NZ is doing worse than par.

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  1. Mick
    April 4th, 2015 at 13:32 | #1

    The ol’ Balassa-Samuelson effect.

  2. J-D
    April 4th, 2015 at 14:58 | #2

    If what you say about the tendency of national income levels to converge (under stated conditions) is accurate, it would seem to follow that national income levels will only fail to converge when the stated conditions are not met: that is, when the countries in question don’t have access to the same technology, or don’t have similar levels of education.

    Is that empirically the case? Also, how much territory does that exception cover in practice?

  3. John Quiggin
    April 4th, 2015 at 15:06 | #3

    @J-D

    Q1 Yes, convergence is evident in such cases eg between US states or European countries post 1950. That’s where the 2 per cent empirical estimate comes from.

    Q2 A lot of territory, as witness the massive divergence that took place between the Industrial Revolution and the second half of C20, after which poor countries started catching up in groups (not until v recently in Africa)

  4. Jim Rose
    April 4th, 2015 at 16:28 | #4

    @John Quiggin Robert Barro’s iron law of convergence is more interesting when you start looking for exceptions. Examples would be Japan, Singapore, Hong Kong, and South Korea.

  5. Ikonoclast
    April 4th, 2015 at 16:37 | #5

    Was there a time when NZ per capita income (as PPP) was on a par with Australia? If so, why did the countries diverge? If the factors that caused the divergence are not exhausted in their effects, this would indicate that 50 years might not be a good estimate for convergence.

    I am very sceptical about predictions for economic or demographic growth to fifty years hence. There are too many variables. Modern scientific predictions (climate change, disappearance of Arctic sea ice for example) are on much firmer ground than such economic predictions. Personally, I don’t think we have a ghost of a chance of predicting economics fifty years from now except for the very likely impact of limiting exogenous factors (correct term?) like environmental changes and resource limits. What I mean is that climate change, sea level rise, top soil loss, dying oceans, deforestation and overall limits to growth will likely mean that economic growth prospects to 50 years hence are not nearly as rosy as endless-growthers believe.

    All such growth prognostications now are like measuring the growth rate of a child and coming up with the result he/she will be 10 meters tall at age 50.

  6. John Quiggin
    April 4th, 2015 at 17:55 | #6

    @Ikonoclast

    The two countries were roughly on a par until the 1970s. I’ve edited the post to update this.

    The 50 year number isn’t meant as a prediction; it’s just meant to give a feel for the pace of convergence.

  7. Ikonoclast
    April 4th, 2015 at 20:33 | #7

    @John Quiggin

    You could just be saying the tendency to convergance and/or the different stages of the macroeconomic cycle could explain the current performance difference. I agree with the latter. Maybe the tendency to convergance is like the tendency for the rate of profit to fall? ūüėČ

    I guess my point is that the convergance theory will of little or no use from now on, IMO. The last fifty years were not affected by limits to growth effects. The next 50 years look very likely to be affected by limits to growth effects. Convergance could evaporate with LTG. We might even see divergance again. Developed nations (and strong current developers like China) could take the lion’s share of diminishing resources. Under-developed nations could well slump back first.

  8. James Wimberley
    April 4th, 2015 at 22:31 | #8

    “The two countries were roughly on a par until the 1970s.” So what led to the now large gap? Sorry if you have answered this question elsewhere.

  9. Mick
    April 5th, 2015 at 01:59 | #9

    @Ikonoclast #7 cf. Trans Pacific Partnership and ISDS

  10. April 5th, 2015 at 06:46 | #10

    Ptr Q said:

    How does this affect comparisons between Australia and New Zealand. The IMF estimates here give income per person of 45138 for Australian and 33626 for New Zealand. So Australia’s income is about 35 per cent above the New Zealand level. The two countries were roughly on a par until the 1970s.
    The standard convergence estimate is that NZ should make up about 2 per cent of that gap (or 0.7 per cent of GDP) each year. If the gap is larger, NZ could reasonably be said to be outperforming Australia for the year in question, relative to the standard 50 year timeframe for convergence. If the gap is smaller, NZ is doing worse than par.

    But NZ is not a “poor” country in the ordinary meaning of the word, that is to say, Less¬†Developed Countries (LDC)¬†or Newly Indrialized¬†Countries (NIC). It has endured lower growth over the past 40 years typical of stagnating¬†rural-regional areas suffering from¬†both adverse movements in international terms of trade and a brain drain.¬†In that respect it shares some economic (and ecologic) similarties with Tasmania.

    NZ, in¬†the aftermath of the entry of the UK into the EU, underwent a kind of double shock treatment, transitioning from an economy dominated by primary industry to a more service based economy and an transitioning from a heavily state regulated economy to a more laissez-faire system. It’s¬†unceremonious ejection from the Sterling Area precipitated a massive decline in living standards. Wikipedia reports:

    Britain gained full membership of the EEC on 1 January 1973, and all trade agreements with New Zealand came to an end, except the Luxembourg Agreement.[101] By the end of that year, only 26.8% of New Zealand’s exports were to Britain.[102] This had a significant effect on the standard of living. In 1953, New Zealand had the third highest standard in the world. By 1978, it had dropped to 22nd place.[99]

    It has also suffered the classic “brain drain” from country to town, that is from New Zealand cities to Australian Eastern Seaboard¬†cities. Harvard Business Review reports:

    the Organization for Economic Cooperation and Development (OECD) estimates that almost a quarter (24.2%) of all New Zealanders with university-level educations have emigrated. Among OECD nations, only Ireland has suffered as much brain drain.
    Consider how the talent exodus is playing out New Zealand: between 2012 and 2013, the country’s researcher headcount (per million of the population) dropped by almost 11% and its ranking in the Global Innovation Index dropped four slots. Given that innovation can be a highly influential driver of competitive advantage, how can New Zealand build or maintain any advantage while losing so many of its best and brightest?

    There is some prospect of NZ¬†“catching up” to AUS, based on a reversal of these trends. Over the past decade NZ¬†has made some kind of recovery largely based on improvements in its Terms of Trade, owing to a rise in agricultural commodity prices and a fall in oil prices: NZ Stats reports:

    The merchandise terms of trade has shown an upward trend since the start of the 2000s. By the June 2011 quarter, the terms of trade had reached its highest level in 37 years, and was up nearly 60 percent on the lows reached shortly after the New Zealand dollar was floated in March 1985. However, in 2011 it was still 10 percent below a short-lived peak in 1973 that ended abruptly with the oil crisis in that year.

    There is potential for NZ to generate a brain gain. My best guess is that it should concentrate on ramping up immigration from high IQ jurisdictions of North East Asia (Asian Tigers plus PRC) which would probably improve its agricultural trade with the region and also increase the rate of human capital accumulation. This is already happening, according to the Conversation:

    In 2001, the largest overseas birthplace population was from the UK and Ireland. In 2013, at 32%, Asian communities make up the largest group of overseas-born people in New Zealand, replacing the British and Irish, who now make up a little more than one-quarter of this overseas-born population. In terms of New Zealand national population, Asian-born people almost doubled in size from 6.6% in 2001 to 11.8% in 2013, or 471,700 people. This compares with 295,900 for Pacific Island populations.

    Finally, being a cooler, damper country, NZ is well-placed to benefit from the Global Warming exodus. It is an ideal destination for well-off people seeking a quieter, cleaner, cooler life. Older people don’t much care for hot weather. There are plenty of child-less aging Baby Boomers who could benefit from its cheaper house prices. lower taxes and wholesome environment, whiling away their autumnal years fishing, skiing and hiking. It could well become the Southern Hemisphere”s up-market retirement village.

  11. Ikonoclast
    April 5th, 2015 at 09:41 | #11

    I would actually advocate the creation of a new Federated country of Australasia with two new states added to it in additon to the states of Australia, namely the Nth Island and Sth Island of New Zealand. Various sweeteners could and should be offered to New Zealand to put through this deal.

    (1) Make the $A the currency and give the $NZ parity at conversion if its value is below the $A and its real exchange value if it is above parity at conversion.

    (2) Make Canberra and Wellington dual capitals and rotate the parliament each year.

    (3) Keep separate rugby teams as they do in the UK (this would be very important to NZ).

    (4) Make financial transfers to assist NZ to develop (as we do for Tasmania).

    Overall, benefits of scale and uniformity would assist both nations.

    A really challenging idea would to be explore letting PNG and Polynesian islands join Australasia and if they wished to to form the country of Oceania. Transition arrangements would be required and could run as long as ten years. Could we integrate them successfully and assist their development? That’s an interesting question.

  12. Peter T
    April 5th, 2015 at 12:03 | #12

    The failures and hiccups are as instructive as the successes:

    http://glineq.blogspot.com.au/2015/03/v-behaviorurldefaultvmlo.html

  13. April 5th, 2015 at 13:11 | #13

    Convergence does not happen by magic. The classic case is that of Argentina. In 1900, Canada was indistinguishable from Argentina in terms of per capita income. And New Zealand was 10% higher than the US (and above Australia).

    A more recent case of a spectacular fall would be that of Venezuela.

  14. Peter Whiteford
    April 6th, 2015 at 07:34 | #14

    If you subtract the temporary boost to GDP growth from rebuilding Christchurch then the figures in the Weekend Australian imply that NZ GDP growth is about 0.5 percentage points below Australia.

  15. Mick
    April 8th, 2015 at 23:31 | #15

    Given that the current phase of the global crisis is one of investment, there is a particularly damning chart in this blog from Marxian economist Michael Roberts – 3rd or 4th graph down: Change in private non-residential gross fixed capital formation 2007-2014 https://thenextrecession.wordpress.com/2015/04/08/low-investment-is-the-cause-of-low-growth-surprise/

    Of the countries listed, NZ performs worst and Australia (mainly due to the narrow scope of capital inflows to the resources industry) only just keeps it head above water.

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